"Reinvigorate Trade to Boost Global Economic Growth," By Christine Lagarde, Managing Director, IMF
IMF News, April 23, 2015
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Bibliographic details
- Authors: Christine Lagarde
- Published: April 23, 2015
Overview / Key argument
- Speech delivered at the U.S. Ex-Im Bank Conference, Washington, DC, April 23, 2015. As Prepared for Delivery.
- Central claim: expanding global trade is essential to boost growth, innovation, jobs, middle-class real incomes, poverty reduction, and economic fairness.
- The IMF’s mandate (Article 1 of the Articles of Agreement) includes facilitating "the expansion and balanced growth of international trade" to promote high levels of employment and real income.
Why do we need a more powerful trade engine?
- Trade contributes to growth by enabling countries to specialize according to comparative advantage, increasing world production and consumption.
- Direct and indirect channels through which trade raises growth:
- Reforms and new trade agreements encourage specialization and lower prices, raising real incomes and variety of goods and services.
- Trade reforms can increase external competition in product and services markets.
- Trade reforms can encourage key infrastructure investments (e.g., new ports and new roads).
- Trade can spur innovation through R&D and “learning by exporting”.
- Trade can strengthen institutions by encouraging better governance and a better business environment.
- Trade helps reverse declining productivity growth:
- Recent IMF research shows lower productivity is a key driver of declining potential growth rates in advanced economies and emerging market economies.
- Potential annual growth in advanced economies "fell to 1.5 percent in the past two years, down from 2.2 percent in 2001-07."
- Trade and jobs / poverty reduction:
- Exports of goods and services directly and indirectly supported an estimated "11.7 million U.S. jobs" in 2014.
- Hundreds of millions of people have been lifted out of poverty over the past three decades via trade-led growth.
How can global trade be shifted into a higher gear?
- Recent trend: post-2008 slowdown — "2015 is likely to mark the fourth consecutive year of below-average trade growth, with at least one more year of disappointing growth to come," per WTO predictions cited.
- Two structural changes holding back trade growth:
- Maturing of existing global value chains in North America, Europe, and Southeast Asia while new value chains are not being formed.
- Policy implication: unlock trade potential of South America, South Asia, Sub-Saharan Africa, and the Middle East and North Africa to better integrate them into global value chains.
- Slowdown in trade liberalization: multilateral negotiations stalled; regional initiatives have not matched transformative effects of past agreements.
- Policy implication: press ahead with negotiations on the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).
- Quantified potential gains from trade agreements cited:
- Peterson Institute research: "the TPP could boost world income by $295 billion per year over the next decade."
- Same research: "the TTP would raise U.S. incomes by 0.4 percent, or $77 billion, per year."
- European Union estimates: "The U.S. could gain a comparable amount from TTIP."
- Bali WTO deal (end of 2013): if fully implemented, would cut trade costs and "deliver an economic boost of US$1 trillion annually."
- Political dynamics:
- Recent developments in the U.S. Senate suggest potential cooperation between Congress and the President on trade deals.
- Japan views the TPP as a tool to inject competition into its low-growth economy.
- Political leadership is needed to finalize major trade deals.
- Role of trade facilitation:
- Bali deal’s focus on trade facilitation (reducing red tape, streamlining customs) is "particularly important for developing economies."
Which trade policies should economies pursue?
- IMF reviewed its policy advice to keep trade central in operational work, technical assistance, and annual assessments.
- Country-specific advice, but three broad categories:
- Advanced economies:
- Focus on "21st century trade issues": opening services markets, making regulatory systems more coherent, intellectual property protection, treatment of state-owned enterprises (examples addressed by TPP).
- Emerging market economies (especially South Asia and Latin America):
- Can still benefit from traditional trade liberalization, unilateral opening, attracting foreign direct investment, and infrastructure investment.
- Quantified infrastructure need in Asia: "In this decade alone, overall national infrastructure investment needs are estimated to be $8 trillion."
- Developing economies:
- Make trade and integration into global value chains a central plank of development strategies.
- Emphasize trade facilitation.
- IMF stands ready to support transitions to less protected environments, advise on fiscal implications of lower tariffs, and assist with sequencing reforms and hands-on training.
Policy recommendations and priorities
- Strongly support smart efforts to reduce and dismantle both:
- Old-style, in-your-face protectionism.
- New protectionism based on non-tariff measures.
- Support preferential trade deals (e.g., TPP) but encourage eventual openness: TPP "should eventually be open to other countries that meet its requirements."
- Pursue coherence between preferential deals and multilateral efforts to avoid trade fragmentation ("the 'spaghetti bowl' of competing regimes and preferences").
- Aim for multilateralization preferably in the context of the World Trade Organization; global deals are preferred because they allow new trading relationships to be formed.
- Political leadership and cooperation are required to conclude transformative trade agreements and reverse the slowdown in trade-led growth.
Conclusion / Closing message
- Quoting Montesquieu: "Trade is the best cure for prejudice."
- Reinvigorating trade is "essential-to-have" to prevent prolonged low growth ("the 'new mediocre'") and to lift global growth.
- Final call: "If you care about growth, you need to be serious about global trade. It is now time to get serious about trade."
Source: "Reinvigorate Trade to Boost Global Economic Growth," By Christine Lagarde, Managing Director, IMF, April 23, 2015.